Schwartz Financial Weekly Commentary 4/29/13

The Markets

If anyone doubted the power of Twitter, their skepticism was laid to rest this week. Early Tuesday afternoon, a tweet from the Associated Press reported President Obama had been injured by explosions in the White House. Stock, bond, and commodity markets fell sharply on the news and then rebounded when the Associated Press communicated that its Twitter account had been hacked. This wasn’t the first time such a thing had happened on Twitter or the first time false and market moving information had been posted. In February, the stocks of Burger King and Jeep moved after a post on each company’s Twitter account indicated the company had been sold to a rival firm. The lesson to take from these events? Everyone may want to be wary about buying or selling investments based on news reported through Twitter or any other social media feeds.

 

Economic and earnings news was mixed during the week. Durable goods orders were off by almost 6 percent which was a mark in the negative column. There were fewer jobless claims than analysts expected which was a positive. The initial estimate of U.S. GDP growth for first quarter was released by the Commerce Department. Growth was about 2.5 percent annualized during the first quarter. That was significantly above fourth quarter’s 0.4 percent annualized growth, but below expectations for 3.0 percent growth. An above average number of companies beat expectations for the quarter. Sixty-nine percent of the companies in the Standard & Poor’s 500 beat analysts' expectations, according to Thomson Reuters data reported on Yahoo! Finance. Since 1994, about 63 percent of companies have beaten expectations on average.

 

Markets generally recovered from Twitter trickery and were unfazed by mixed economic news. Stock markets finish the week higher with the Standard & Poor's 500 gaining 1.7 percent, the Dow Jones Industrial Average rising by 1.1 percent and NASDAQ Composite Index up 2.3 percent. Treasury prices were higher by the end of the week. According to Bloomberg.com, that’s an indication the world still believes U.S. Treasuries are a safe haven.

 

Data as of 4/26/13	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	1.7%	10.9%	13.0%	9.3%	2.5%	5.6%
10-year Treasury Note (Yield Only)	1.7	N/A	2.0	3.8	3.8	3.9
Gold (per ounce)	4.7	-13.1	-11.0	8.4	10.6	16.0
DJ-UBS Commodity Index	0.3	-5.1	-5.5	-1.0	-9.2	1.7
DJ Equity All REIT TR Index	0.2	12.8	19.4	15.6	6.1	12.5

Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

what’s the story with gold? According to an April 2012 Gallup Poll, Americans believe gold is the best long-term investment. Overall, real estate, stocks, and savings accounts were near-followers. When Gallup broke the statistics down demographically, they found men prefer gold while women prefer real estate, independents prefer gold while Democrats and Republicans prefer stock, and wealthier people prefer real estate and stocks while middle and lower income Americans prefer gold.

 

Gold’s popularity is interesting because research suggests investors hold less than 20 percent of the world’s $9 trillion gold supply. Much of the world’s gold is held by central banks – the U.S. Federal Reserve, the European Central Bank, and others – and other financial institutions. One of the world’s largest holders of gold is the International Monetary Fund (IMF). The IMF is “an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

 

The IMF and central banks hold gold as foreign exchange currency reserves because gold is universally accepted and highly liquid, according to The Economic Times. The World Gold Council reports developed countries often hold a significant portion of their reserves in gold. The United States has 75.1 percent of its reserves in gold, Germany has 72.1 percent, Italy has 71.3 percent, France has 69.5 percent, and the Netherlands 58.7 percent. In addition, central banks in emerging countries hold gold reserves although their reserves are often smaller than those of developed countries. Early in 2013, 9.5 percent of Russia’s reserves were gold, 9.6 percent of India’s, and 1.6 percent of China’s.

 

Some experts believe high demand for gold from emerging countries combined with limited gold supply may push gold prices higher. Other experts have compared the recent highs of the gold market to the dotcom and housing bubbles. Who’s right? Only time will tell.

 

Weekly Focus – Think About It

 

“Faith consists in believing when it is beyond the power of reason to believe.”

--Voltaire, writer, historian, and philosopher

Value vs. Growth Investing (4/26/13)

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	1.82	11.78	1.10	5.71	15.66	11.79	5.38
Large Cap	1.73	11.58	1.54	6.07	15.32	11.73	4.61
Large Core	1.29	15.81	3.08	8.83	21.71	13.35	6.67
Large Growth	1.69	7.25	0.26	3.59	7.49	10.95	5.04
Large Value	2.18	12.30	1.43	6.11	17.68	11.03	1.94
Mid Cap	1.96	12.74	0.46	5.09	16.81	12.25	6.87
Mid Core	1.77	12.15	-0.16	4.92	16.76	14.02	7.95
Mid Growth	1.94	10.21	0.29	2.51	11.46	11.58	4.76
Mid Value	2.16	15.97	1.23	7.95	22.51	11.05	7.86
Small Cap	2.45	11.09	-1.53	3.74	15.88	10.77	8.39
Small Core	2.27	11.25	-1.33	4.07	15.51	9.67	7.62
Small Growth	2.89	9.26	-1.68	2.25	11.92	11.91	7.58
Small Value	2.23	12.65	-1.61	4.81	20.24	10.75	9.86
US Core	1.46	14.69	2.06	7.63	20.26	13.26	7.12
US Growth	1.81	7.96	0.14	3.28	8.54	11.22	5.20
US Value	2.18	13.06	1.18	6.39	18.80	11.00	3.67

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

 

Office Notes:

How Long Will It Take to Double My Money?

Before making any investment decision, one of the key elements you face is working out the real rate of return on your investment.

Compound interest is critical to investment growth. Whether your financial portfolio consists solely of a deposit account at your local bank or a series of highly leveraged investments, your rate of return is dramatically improved by the compounding factor.

With simple interest, interest is paid just on the principal. With compound interest, the return that you receive on your initial investment is automatically reinvested. In other words, you receive interest on the interest.

But just how quickly does your money grow? The easiest way to work that out is by using what's known as the “Rule of 72.”¹ Quite simply, the “Rule of 72” enables you to determine how long it will take for the money you've invested on a compound interest basis to double. You divide 72 by the interest rate to get the answer.

For example, if you invest $10,000 at 10 percent compound interest, then the “Rule of 72” states that in 7.2 years you will have $20,000. You divide 72 by 10 percent to get the time it takes for your money to double. The “Rule of 72” is a rule of thumb that gives approximate results. It is most accurate for hypothetical rates between 5 and 20 percent.

While compound interest is a great ally to an investor, inflation is one of the greatest enemies. The “Rule of 72” can also highlight the damage that inflation can do to your money.

Let’s say you decide not to invest your $10,000 but hide it under your mattress instead. Assuming an inflation rate of 4.5 percent, in 16 years your $10,000 will have lost half of its value.

The real rate of return is the key to how quickly the value of your investment will grow. If you are receiving 10 percent interest on an investment but inflation is running at 4 percent, then your real rate of return is 6 percent. In such a scenario, it will take your money 12 years to double in value.

The “Rule of 72” is a quick and easy way to determine the value of compound interest over time. By taking the real rate of return into consideration (nominal interest less inflation), you can see how soon a particular investment will double the value of your money.

1 The Rule of 72 is a mathematical concept, and the hypothetical return illustrated is not representative of a specific investment. Also note that the principal and yield of securities will fluctuate with changes in market conditions so that the shares, when sold, may be worth more or less than their original cost.The Rule of 72 does not include adjustments for income or taxation. It assumes that interest is compounded annually.Actual results will vary.

 

Regards,

,

Michael L. Schwartz, RFC®, CWS®, CFS

 

P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added. 

 

Michael L. Schwartz, RFC®, CWS®, CFS, offers securities through First Allied Securities, Inc., A Registered Broker/Dealer,  Member FINRA-SIPC.  Advisory Services offered through First Allied Advisory Services, A Registered Investment Advisor.

Schwartz Financial Service is not an affiliate of First Allied Securities, Inc.

 

This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.

 

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

 

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

 

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

 

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

 

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

 

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

 

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

 

* Past performance does not guarantee future results.

 

* You cannot invest directly in an index.

 

* Consult your financial professional before making any investment decision.

 

* To unsubscribe from our “market commentary” please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at “mike@schwartzfinancial.com”.